Why don’t the competition authorities understand IP licensing?

The European Commission (EC) has recently started a consultation exercise on its draft Technology Transfer Block Exemption Regulation (TTBER) and draft Guidelines for Technology Transfer Agreements.  The draft TTBER is designed to replace the current TTBER when it expires in 2014.  The draft Guidelines are being updated to reflect the EC’s current thinking on the competition issues that arise in licence agreements.  The draft documents can be found here.  The consultation exercise ends on 17 May 2013.

For readers who are not familiar with these documents, here is the nutshell summary.

Agreements that affect trade between EU member states and contain anti-competitive terms may be in breach of Article 101(1) of the Treaty on the Functioning of the European Union.  Where a breach occurs, parties may be fined up to 10% of their worldwide group turnover.  The agreement, or the offending terms, may be void.  Parties may be sued by third parties who suffer loss.  However, a breach doesn’t occur if the offending terms can be justified under Article 101(3).  That is generally up to a court to decide.

Rather than run the risk of breach, parties sometimes or often try to bring their agreement within the “safe harbour” of a block exemption regulation (BER).  Agreements that fit with a BER get automatic exemption under Article 101(3).  The BER for technology licensing is the Technology Transfer BER (TTBER), which covers patent and know-how licensing and a whole lot else besides.  BERs typically remain in force for about a decade and are then replaced.  The current TTBER is due to expire in 2014.  Hence the consultation over what should replace it.

Regrettably, the EC does not seem to have published a red-line version of the two drafts, showing changes over the current documents.  IP Draughts’ excellent trainee, Christopher Beck, has done so; please let us know if you would like a copy.

In the last few days, IP Draughts has been working on a draft submission to the EC in response to its consultation.  There is plenty to react to in the two documents, but two points really jumped out when he reviewed the drafts, and a third point seems to follow a trend.

1. Still no certainty for mid-level agreements. The TTBER continues to drift away from its original purpose as a simple checklist of what terms are, or are not, acceptable in a technology licence agreement.  This really started to happen in the 2004 TTBER; the draft TTBER takes us further on this path.  The EC has expanded its thinking on new and, in some cases, rather exotic scenarios where IP licensing causes serious competition concerns.  What we don’t have, though, is a straightforward set of rules for the majority of licence agreements that are, potentially, in breach of Article 101 but are not likely to cause competition concerns.  In particular, it is unrealistic to expect managers of SMEs and general commercial lawyers to understand and interpret complex provisions in the TTBER about market shares in technology markets and whether the parties are competitors in those markets.
2. No-challenge clauses. For decades, transactional IP lawyers in the EU have known that, if you want to fit with the TTBER, you mustn’t include in the licence agreement any provision that prohibits the licensee from challenging the validity of the licensed IP, but it is acceptable to include a provision that allows the licensor to terminate the agreement if such a challenge is made.  The draft TTBER would tighten up on no-challenge clauses by making even a “termination on challenge” clause fall outside the TTBER.  This could have the effect of locking a party into a licence agreement with its commercial enemy.  This seems, to IP Draughts, a crazy and counter-intuitive idea, which is unlikely to be acceptable to IP owners.
3. Software distribution is not IP licensing. It is interesting to see that the EC now considers software distribution agreements to be closer to distribution agreements than IP licence agreements, and therefore to be assessed under the BER for Vertical Agreements, rather than the TTBER.  Similarly, the Guidelines state that shrink-wrap licences are not really IP licences either, and are more in the nature of the sale of goods.  This view from a competition perspective coincides with some of IP Draughts’ thoughts from a commercial law perspective, which he has previously expressed on this blog.  It is unclear to IP Draughts how much software licensing is left to be assessed under the TTBER.  It seems from the Guidelines that software licensing where software is incorporated into a licensed product is what the EC has in mind.

IP Draughts perceives a sharper mind behind the draft TTBER than the one that hatched the 2004 TTBER; certainly some of the drafting changes show a more incisive approach and a better command of English.  But it is still the mind of an economist who sees dangers rather than opportunities in IP licensing, and who seems to be very remote from the practical realities of technology transfer.

What happens to a sub-licence when the head licence is terminated?

Photo taken by IP Draughts from London Eye during London Olympics 2012

You can wait ages for a bus, and then several arrive at the same time.  Similarly, you can wait decades for any case law on the rights of a sub-licensee when the head licence terminates, and then find several cases in short succession.

This blog has reported on a pair of recent German cases where it was decided that a sub-licence of copyright survived termination of the head licence.  The comments to that posting discuss a similar position under US laws, apparently based on the law of agency.  However, for English authority, IP Draughts has had to dredge up the 1925 case of Austin Baldwin v Magnetic Car Company (1925) 42 RPC 454, which was understood to confirm that a sub-licensee has no greater rights than the head licensee, so that when the head licence terminates, so does the sub-licence.

Now, at last, we have a modern, English case on the subject.  In VLM Holdings Limited v Ravensworth Digital Services Limited [2103] EWHC 228 (Ch), decided on 13 February 2013 and reported here, Mann J has considered the rights of a sub-licensee of software in just this situation.

In essence, Mann J considered that there was no one-size-fits-all answer to this question.  He was not prepared to follow the submission of the IP owner’s counsel, that the legal maxim nemo dat quod non habet should be followed.  (IP Draughts is surprised to see Latin in an English court judgment.  He thought Lord Woolf had banned Latin from being used in the English courts.  A rough translation of this expression would be “no-one can give what he doesn’t own”.)

In Mann J’s judgment:

The real question is …as to the scope of the authority given by the head licensor to the sub-licensor.  That depends on all the facts. If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor (copyright owner) must be taken as giving the ultimate permission himself, on normal agency principles.

The facts of this case had some distinctive features.  The IP owner and the head licensee were both in the same group of companies and had the same directors.  Mann J considered that the conduct of the IP owner was such as to grant agency authority to the head licensee to bind the IP owner to the terms of the sub-licence.  Mann J also considered various other legal principles put forward by counsel for the sub-licensee, including estoppel.

IP Draughts’ sense is that IP owners as a class should not panic as a result of this case, which turned largely on its distinctive facts.  IP owners should continue to include in their licence agreements a provision that states that sub-licences automatically terminate when the head licence terminates (obviously this is only appropriate if sub-licensing is allowed in the head licence agreement).

The key point is that English law is now less absolute than it was before, and perhaps a little closer to US law on this subject.  Parties should address the question of whether sub-licences survive in the contract, rather than make assumptions.